City calls for shift in strategy as BP's profits fail to impress

Oil giant has failed to meet forecasts and share price fell as profits of $5.6bn missed expectations

Analysts and investors hoping for a radical shift in strategy at BP were left disappointed by chief executive Bob Dudley yesterday.

The oil giant also failed to meet forecasts, with its share price falling on news of $5.6bn (£3.4bn) in underlying profits for the second quarter, against market expectations of $6bn. The figures were hit by the post-spill lull of activity in the Gulf, along with production problems in Angola and planned maintenance in the North Sea, which together offset the impact of soaring oil prices.

Analysts said the group, which has yet to make its first application to drill in the Gulf since last year's spill, had failed to set out a convincing strategy. Mr Dudley, who took the helm after Tony Hayward left in the wake of the disaster last year, had attempted to open up an ambitious new avenue for growth with plans to exploit Russia's oil-rich Arctic continental shelf with Rosneft, the state-owned oil company. But the deal collapsed in May after BP failed to secure a compromise between Rosneft and its existing Russian partners at TNK-BP, who objected to the initial pact, claiming that it violated their shareholder agreement.

Analysts said BP had failed to impress with its post-spill plans. "Other companies have clearly redefined their strategy over the last 12 to 24 months... ExxonMobil continues to build its shale gas business in the US and Shell is focused on mega gas projects. But what is BP doing?" Dougie Youngson, an analyst at Arbuthnot Securities, said, adding that, besides its plans to divest $30bn-worth of assets by the end of the of year, it was unclear "how BP is going to recover".

"BP appears to be running a 'business as usual strategy' and we are not convinced that the market will put up with this for much longer," he warned. "BP has been significantly underperforming the peer group for some time and this looks set to continue."

Collins Stewart added that, contrary to market speculation about the possibility of a ConocoPhillips-style split, BP had not outlined a major change in the direction of its business. Earlier this month, Conoco decided to split its refinery arm to spur growth.

"We do not think management's statement points to a high likelihood of the radical action speculated in the market in recent days, but more to a longer-term, largely organic driven recovery," the broker said.

BP's share price fell 12.15p to 463.25p after investors digested the update. Although off lows, the stock remains well below the levels seen before the spill.

For his part, Mr Dudley said things would get better. "We expect the momentum of our recovery to build into 2012 and 2013 as new projects come on stream, particularly in higher margin areas; as we complete current turnaround activity; as we return to work in the Gulf of Mexico; and as uncertainties reduce," he said.

The company said the $5.6bn profit was primarily down to high commodity prices and refining margins. Against that, BP's second quarter performance was hit by a decline in production and higher costs, "many of which are temporary and specific" to prevailing circumstances.

Reduction in Gulf bill

Legal settlements with Moex and Weatherford, two other firms linked to last year's disaster at the Deepwater Horizon rig in the Gulf of Mexico, led to a reduction in the bill that landed at BP's door in the aftermath of the accident, the company said yesterday.

The oil giant had made $40.9bn in provisions in its 2010 accounts to cover the costs of the response, and the $20bn trust fund overseen by the US Government-appointed administrator Kenneth Feinberg.

But yesterday, BP said settlements with Moex and Weatherford had brought the bill down by $600m. The Moex settlement was worth $1.1bn, while Weatherford agreed to pay $75m toward the cost of the spill. The injection was partly offset, however, by ongoing spill costs. Along with the lower charge, BP revealed that, thus far, a total of $6.8bn had been paid to fund the restoration of the local economy and the environment. BP said the money was for claims from individuals and businesses, and government entities.